US Tax Law (Section and regulations)

US Tax Law (Section and regulations)

1) Several years ago, Courtney borrowed $100,000 of recourse debt from the Friendly Local Bank and used it to buy some equipment to start up a business. Courtney’s business results have been disappointing and she has not made any principal payments on the loan, but she has paid all of the interest due. Courtney has fallen on hard times and her only asset is the equipment, which is now worth $75,000 and in which she now has an adjusted basis of $50,000. Courtney has no other assets and no other liabilities. If the bank cancels the debt in exchange for the apartment building, what are the income tax consequences to Courtney?
a) Primary authorities relied on in answering
b) Discussion:

2) Individual A sells a rental building, its office equipment, furniture and fixtures, and its land to Individual B. Individual A realizes gain on the sale of the building, equipment, furniture and fixtures and land. Individual A rented the building to commercial tenants.

What is the character of the gain realized?

3) Eleanor exchanged Lakefront land held for investment for a parcel Mountaintop land. Eleanor intends to hold the Mountaintop land for investment as well. Eleanor’s basis in the Lakefront property is $40,000. It is subject to a mortgage of $60,000 (which the acquirer, Fenton, assumes).

In order to obtain Eleanor’s property, Fenton transferred the Mountaintop property (worth $100,000). The Mountaintop property was subject to a mortgage of $30,000. Fenton’s basis in the property was $110,000. In addition, Fenton transferred stock with a fair value of $25,000 (basis of $18,000). Fenton held the Mountaintop property for business, but intends to hold the Lakefront property for investment.

Required:

a) Briefly (1 -2 sentences) explain how Eleanor and Fenton will report this exchange for federal tax purposes. List the authorities on which you rely.

For requirements b-d, make sure you provide labeled computations. If you don’t do this and your answer is incorrect, or if you just show numbers that are not correct and do not provide explanatory labels, partial points cannot be awarded.

Key 1: Assumes Eleanor takes over Fenton’s mortgage

b) What is the fair market value of Eleanor’s lakefront property?

C) What are the tax consequences of the exchange to Eleanor?
• Gain (loss) realized
• Gain (loss) recognized
• Basis in Mountain property

d) What are the tax consequences of the exchange to Fenton?
• Gain (loss) realized
• Gain (loss) recognized
• Basis in Lakefront property

Key 2: Assumes Eleanor does not assume Fenton’s mortgage

b) What is the fair market value of Eleanor’s lakefront property?
c) What are the tax consequences of the exchange to Eleanor?
• Gain(loss) realized
• Gain (loss) recognized
• Basis in Mountain property

d) What are the tax consequences of the exchange to Fenton?
• Gain (loss) realized
• Gain (loss) recognized
• Basis in Lakefront property